My company just started offering in-service distribution of after-tax 401k. My company places a limit of 20k distribution per calendar year and can do a distribution once a quarter, so I plan to contribute 20k this year and roll it over into a Roth IRA two times this year. I currently do a back-door Roth IRA contribution and max out my traditional 401k at 17.5k. I don't have any balance in a traditional IRA.

Questions:1. My 401k is with Fidelity and my Roth IRA is with Vanguard. It seems like it would be more convenient to open another Roth IRA with Fidelity, since they could do the rollover with a single phone call. However, I would like to avoid opening another account. How tedious is the process of rolling over from Fidelity to Vanguard? Sounds like I have to fill out some paperwork from Fidelity, they will send a check, and then I have to forward the check to Vanguard. Anyone have experience with this? Does this make tax reporting any more complicated or is there likely to be more mistakes?

2. The Vanguard rep recommended contacting a tax professional before doing this and to be very careful about IRS rules, which made me a little nervous. Is it recommended to contact a tax professional before doing this? Is there anything I should watch out for or get clarification on?

3. There is also the option to convert from an after-tax 401k to a Roth 401k. Any advantages to doing this instead?

Re: #3, if you can do in-plan conversions, that can be better or worse, depending on how good your 401k plan options are. If they're excellent, do that and save yourself the hassle. If they're not that great, get them out and to Vanguard.

With regard to the tax implications, the big one is whether you'll be taxed on earnings. Some people have had success getting the basis converted to Roth while moving the earnings to a Traditional; this may be easiest if you open a temporary account at Fidelity to receive the funds, then move them from Fidelity to Vanguard once you've gotten the tax status you need.

(NB: I haven't been through this process myself. My plan just started offering in-plan conversions, but I don't contribute enough to need them at this point.)

1. Not particularly tedious. Usually, they will send a check made out to the receiving custodian, with a For-Benefit-Of designation in your name. You then forward that to the new custodian with whatever form they might require.

2. They always say that sort of thing. You don't need a tax professional. A lot depends on what you want to do exactly. If you haven't been making after-tax contribution, and will roll over the new one frequently, then there's little need for splitting basis and earnings. As such, you deposit the distribution into the Roth, fill out 8606 at tax time, and pay tax on any earnings.

3. The advantages to in-plan conversion are simplicity, better protection from liability, and possible access to institutional funds.

In-service distribution or in-service rollover? They're different. A distribution might mean that they're letting you take your after tax money out. That wouldn't create a taxable event, even if the check is sent directly to you. Normally, you have to be at least 59 1/2 to be allowed to do this.

It might pay to double check and see exactly what they're letting you do.

In cases where the check is made out to the employee an indirect 60 day rollover can be done, and it's actually the first step necessary to isolate your basis if you are inclined to do that. For example, if you have after tax contributions of 20k and earnings of 2k, you would get a check for 21,600 with 400 in mandatory withholding sent to the IRS. You would then roll 2k to your TIRA first and then roll 20k to your Roth IRA making up the $400 that was withheld to complete the rollover. You could do fewer rollovers (distributions) this way since the earnings buildup would not become a problem. There would be nothing taxable here, but in the event you are also doing back door Roths, the TIRA balance will result in some taxes for the Roth conversion.

One additional question: After I rollover from after-tax 401k to Roth IRA, can I withdraw the original contribution at any time before 59 1/2 without penalty? I have had the Roth IRA for more than 5 years. I understand that the earnings would not be able to be withdrawn without penalty, but wanted to confirm about the original contribution.

Also wanted to confirm that I cannot do this with a Roth 401k if I were to choose the in-plan conversion instead. This is the primary reason I'm leaning towards the Roth IRA option, as my 401k fund selection is good.

bob1234 wrote:One additional question: After I rollover from after-tax 401k to Roth IRA, can I withdraw the original contribution at any time before 59 1/2 without penalty? I have had the Roth IRA for more than 5 years. I understand that the earnings would not be able to be withdrawn without penalty, but wanted to confirm about the original contribution.

Also wanted to confirm that I cannot do this with a Roth 401k if I were to choose the in-plan conversion instead. This is the primary reason I'm leaning towards the Roth IRA option, as my 401k fund selection is good.

Once in your Roth IRA, these rollovers are treated like Roth IRA conversions done in the year of the rollover. Until your Roth IRA is qualified, the usual ordering rules still apply, ie your regular Roth contributions come out first tax and penalty free. Next are conversions which come out tax free, but have a 10% penalty on the pre tax portion that is not held for 5 years. If you withdrew one of these rollovers that included a small taxable portion (earnings) before 5 years, the taxable portion of the rollover would be subject to a 10% penalty.

Alternatively, if you elected to roll your after tax contributions and their earnings into plan's Roth 401k account, these funds would be treated a little different. First, you may not be able to take a distribution at all until you separated or reached age 59.5. And if you could the Roth 401k things get complicated. A Roth 401k basically has no Roth IRA type ordering rules, but these in plan Roth rollovers do trigger some special ordering rules to non qualified distributions. The in plan rollover money is distributed first, and would therefore trigger a 10% penalty on the taxable portion of that rollover distributed before the 5 year holding period has been completed. Therefore, the ordering rule that does apply is less tax friendly than Roth IRA ordering rules.